Regulatory trends in the RDTI

As the Economic Reform Roundtable approaches, a recent Business Council of Australia (BCA) report highlights the value of stronger research and development (R&D) policies. The report estimates that improved policies could add over AUD 7 billion annually to Australia’s gross domestic product (GDP). It could also boost productivity growth by 0.1% each year.

The Strategic Examination of R&D discussion paper also shows there is great potential to make Australia’s R&D system more efficient, effective, and ambitious.

However, the BCA report notes that Australia’s R&D performance lags behind many OECD countries. Over the past decade, R&D spending has fallen sharply. This concern is reinforced by the Federal Budget 2025–26, which forecasts a drop of AUD 650 million in R&D Tax Incentive (RDTI) payments by 2028–29.

In September or October 2025, the Australian Taxation Office (ATO) will release the second batch of RDTI tax transparency data. For the first time, it will include multinational groups with substituted accounting periods ending 31 December 2022. This will likely increase the amount of high-value claims shown for 2021–22.

Key regulatory and administrative trends

Several important changes are underway affecting RDTI:

• A new online registration form for eligible R&D activities, combined with streamlined, examination-only processes by the Department of Industry, Science and Resources (DISR).
• A renewed ATO focus on RDTI expenditure claims.
• Proposed exclusions of tobacco and gambling activities from the RDTI program.
• Ongoing emphasis on RDTI governance and compliance.

DISR administrative and regulatory changes

From 15 August 2025, a redesigned online R&D application form will be used. The new form offers clearer guidance to align activities with statutory requirements. It allows longer responses and includes smarter prefill options and dropdown menus.

DISR also announced that it will no longer conduct informal risk assessments or education visits as part of its Integrity Framework. Instead, only formal examinations of R&D activities will occur, and only if there is concern over a “high risk of ineligibility.”

In practice, the ATO may refer RDTI eligibility matters to DISR for formal examination or conduct its own assessment.

If DISR finds that one key requirement—such as the purpose to generate new knowledge—is not met, the activity will be rejected outright. Other eligibility aspects will not be examined further.

These changes aim to reduce duplication and confusion, which have caused delays in program decisions.

However, the guidance does not clarify what counts as a “high risk of ineligibility.” This places greater pressure on applicants to submit clear, thorough registrations since DISR will base its decision to examine an application solely on this information.

A single rejected element can push taxpayers quickly into formal dispute processes, such as ATO objections or DISR internal reviews. This may lead to more appeals to the courts, especially where taxpayers are motivated and financially able.

ATO’s renewed focus on RDTI expenditures

Alongside DISR changes, the ATO has increased its audits of RDTI claims, especially those leading to large refunds.

Refunds are often delayed while taxpayers complete detailed questionnaires to explain and justify the methods used to calculate each category of R&D expenditure.

If a claim is rejected, penalties can be steep. The ATO generally seeks to impose a penalty equal to 50% of the tax shortfall, citing recklessness. Additionally, general interest charges (GIC) apply.

Since the pandemic, ATO penalty waivers have dropped from 90% to 70%. Moreover, from 1 July 2025, GIC payments will no longer be deductible for tax purposes.

Areas of ATO focus

The ATO is currently focusing on several expenditure issues:

• Ordinary business activities: Activities that are part of routine business operations and not eligible for RDTI (refer to TA 2017/3).
• Not at-risk expenditure: Payments guaranteed regardless of R&D outcomes (see TR 2021/5 and TA 2023/4).
• Payments to associates: Ensuring expenses claimed have actually been paid or constructively paid by year-end.
• Misclassification of foreign-owned R&D: Some taxpayers incorrectly claim foreign-owned R&D as Australian-owned to access higher cash refunds (TA 2023/5).
• Apportionment of overhead costs: Reasonableness of methods used to split costs like rent and utilities.

Industry-specific concerns

Certain sectors face recurring issues:

• Software development: Claiming entire projects as R&D without identifying specific R&D components.
• Construction and mining: Failure to separate technical experimentation from routine project work.
• Agriculture: Using established methods or focusing on commercial rather than technical risks.

Tribunal decisions

Recent tribunal decisions, including the Body by Michael case, stress the importance of strong, contemporaneous documentation to support claims.

Taxpayers must keep evidence such as dated photos, internal memos, and real-time logs. They should document hypotheses before functional testing starts. Retrospective explanations are unlikely to suffice.

Proposed gambling and tobacco exclusions

The 2024–25 Mid-Year Economic and Fiscal Outlook (MYEFO) announced that gambling and tobacco activities will be excluded from RDTI from 1 July 2025.

At the time of writing, no legislation has been released for consultation.

The announcement follows transparency data showing that gambling entities claimed about AUD 90 million in RDTI.

However, R&D projects aimed at reducing addiction or health risks—such as tools for gamblers to self-exclude or reduce tobacco dependency—may still qualify.

Some commentators worry that such sector-specific exclusions could weaken confidence in the RDTI’s historically neutral, industry-agnostic approach.

RDTI governance issues

The ATO’s “Justified Trust” compliance approach focuses heavily on tax governance frameworks.

For larger RDTI claimants, governance of claims should be robust and integrated within the wider income tax framework.

A strong governance system helps companies take a proactive, pre-emptive approach to RDTI tax risks. This prepares them for potential ATO or DISR review notices.

Conclusion and outlook

The impact of DISR’s new regulatory approach and the ATO’s increased audit activity will become clearer over time.

It remains uncertain whether the tobacco and gambling exclusions will become law.

Since the post-COVID changes that took effect from 1 July 2021, there have been few technical reforms.

Given the pending outcomes of the strategic examination, it may be the calm before the next wave of RDTI policy changes.

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